What are digital banking units?

Finance Minister Nirmala Sitharaman reiterated on Tuesday April 19 her budget announcement on the establishment 75 digital banking hubs in 75 neighborhoods of the country this year. It’s about advancing the government’s digital financial inclusion agenda.

What was the announcement?

In the budget for 2022-23, the finance minister said, “In recent years, innovations in digital banking, digital payments and fintech have been growing at a rapid pace in the country. The government is continuously encouraging these sectors to ensure that the benefits of digital banking services reach every nook and corner of the country in a consumer-friendly manner. To advance this agenda, and to mark 75 years of our independence, it is proposed to establish 75 Digital Banking Units (DBUs) in 75 districts of the country by regular commercial banks”.

What are these DBUs?

Earlier this month, the Reserve Bank of India announced the guidelines for DBUs, following a report by an Indian Banks Association task force. A digital banking unit is a specialized fixed-point business unit or hub housing a certain minimum digital infrastructure to provide digital banking products and services as well as serve existing financial products and services digitally in a self-service mode at all times.

Who will set up these DBUs?

Commercial banks (other than regional rural banks, payment banks and local banks) with previous digital banking experience are permitted to open DBUs in Tier 1-6 centers, unless specifically restricted otherwise, without having need to obtain permission from the RBI in each case.

What services will these units provide?

In accordance with the RBI, each DBU must offer certain minimum digital banking products and services. These products should appear on both the liabilities and assets of the balance sheet of the digital banking segment. Value-added digital services to conventional products would also be considered as such.

Services include savings bank accounts under various schemes, current accounts, fixed deposits and recurring deposit accounts, digital customer kit, mobile banking, internet banking, debit cards, credit cards and transit system cards, digital kit for merchants, UPI QR code, BHIM Aadhaar and point of sale (PoS).

Other services include request creation and customer onboarding for identified retail, MSME or schematic loans. This may also include end-to-end digital processing of these loans from online application to disbursement and identified government-sponsored programs that are covered by the national portal.

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How will these DBUs compete with fintechs?

Currently, fintechs operating as neobanks offer digital banking services but they do so in partnership with non-bank financial companies (NBFCs). Some of the neobanks offering services in India are Jupiter, Fi Money, Niyo, Razorpay X.

Compared to conventional banks with online and mobile banking services, neobanks or digital banks excel in product innovation and offer much better digital solutions. However, given the arrangement they currently have with NBFCs or programmed banks to carry out the actual banking part, some industry players have referred to these digital banks as “glorified digital distribution companies”.

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